RIAs Are Increasing Allocations to Active ETFs: What's Driving the Shift

The Active ETF Tipping Point

After years of passive dominance, active ETFs have reached an inflection point in RIA portfolios. Assets in active ETFs surpassed $700 billion in late 2025, with RIAs driving a disproportionate share of flows. This isn't a temporary trend—it represents a fundamental shift in how advisors construct portfolios.

By the Numbers: Active ETF Growth

Record-Breaking Flows

Category Leaders

The growth isn't uniform across categories. RIAs are concentrating active allocations in:

1. Fixed Income (38% of active ETF flows)

   • Rate volatility rewards active management
   • Credit selection adds measurable alpha
   • Tax-loss harvesting opportunities

2. International Equity (24% of flows)

   • Less efficient markets favor active
   • Currency management adds value
   • ESG integration more nuanced

3. Thematic/Sector (18% of flows)

   • Rapid sector evolution requires active response
   • AI and technology disruption themes
   • Healthcare innovation opportunities

4. Multi-Asset (12% of flows)

   • Dynamic allocation capabilities
   • Risk management integration
   • Simplified portfolio construction

Why RIAs Are Making the Shift

1. Improved Product Quality

The active ETF universe has matured significantly:

Better Managers Entering the Space

• Top mutual fund managers converting strategies
• Institutional-quality investment teams
• Proven track records now in ETF wrapper

Enhanced Structures

• Semi-transparent models protect alpha sources
• Lower costs than mutual fund equivalents
• Improved tax efficiency maintained

Broader Selection

• 1,200+ active ETFs now available
• Coverage across all major asset classes
• Multiple options per category for due diligence

2. Market Environment Favors Active

The current market rewards security selection:

Increased Dispersion

• Stock return dispersion at multi-year highs
• Winners and losers more differentiated
• Index concentration creates risks

Rate Volatility

• Duration management adds value
• Credit spreads require active monitoring
• Yield curve positioning matters

Sector Disruption

• AI reshaping competitive dynamics
• Traditional indices slow to adjust
• Active managers capture transitions

3. Client Demand Evolution

RIA clients increasingly request active strategies:

Sophisticated Investors

• Understanding of passive limitations
• Desire for downside protection
• Interest in specific investment themes

Values-Based Investing

• ESG integration requires active decisions
• Impact measurement and reporting
• Exclusionary and inclusionary screens

Outcome-Oriented Goals

• Income generation focus
• Risk-managed growth
• Capital preservation priorities

4. Practice Differentiation

Active allocation supports RIA business objectives:

Value Proposition

• Demonstrates investment expertise
• Justifies advisory fees
• Creates client conversation topics

Portfolio Customization

• Tailored solutions for client needs
• Tactical adjustment capabilities
• Tax management opportunities

How RIAs Are Implementing Active ETFs

Portfolio Construction Approaches

Core-Satellite Evolution Traditional: 80% passive core / 20% active satellite Emerging: 60% passive / 40% active with specific mandates

Asset Class Specific

• Fixed income: Majority active allocation
• US large cap: Selective active exposure
• International: Significant active tilt
• Alternatives: Primarily active implementation

Due Diligence Frameworks

RIAs applying rigorous evaluation criteria:

Quantitative Factors

• Risk-adjusted returns vs. benchmark
• Tracking error and information ratio
• Downside capture analysis
• Fee-adjusted alpha generation

Qualitative Factors

• Investment team stability and depth
• Process consistency and repeatability
• Firm resources and commitment
• Alignment of interests

Operational Factors

• Trading efficiency and spreads
• Tax management approach
• Transparency and reporting
• Semi-transparent structure mechanics

Implementation Best Practices

Gradual Transition

1. Start with highest-conviction categories
2. Build position sizes over time
3. Monitor tracking and performance
4. Adjust based on results

Manager Diversification

• Multiple active managers per category
• Complementary style exposures
• Avoid single-manager concentration

Cost Consciousness

• Active premium must be justified
• Total cost analysis including trading
• Fee negotiations at scale

Asset Manager Response

Product Development Trends

Managers responding to RIA demand:

Mutual Fund Conversions

• Major fund families converting top performers
• Maintains track record continuity
• Immediate access to distribution

New Strategy Launches

• Purpose-built for ETF structure
• Focus on RIA-preferred categories
• Competitive fee positioning

Semi-Transparent Innovation

• Multiple SEC-approved structures
• Quarterly holdings disclosure options
• Reduced front-running concerns

Distribution Strategy Shifts

RIA-Focused Wholesaling

• Dedicated RIA sales teams
• Investment-led conversations
• Practice management support

Educational Resources

• Portfolio construction guidance
• Implementation case studies
• Due diligence support materials

Technology Integration

• Model portfolio inclusion
• Platform availability priority
• Reporting and analytics tools

Challenges and Considerations

Potential Headwinds

Performance Consistency

• Active management cyclicality
• Manager selection risk
• Style drift concerns

Cost Sensitivity

• Fee pressure continues
• Active premium scrutiny
• Client fee awareness

Complexity Management

• More holdings to monitor
• Rebalancing considerations
• Tax lot tracking

Risk Management

Ongoing Monitoring

• Regular performance attribution
• Manager conviction assessment
• Portfolio impact analysis

Exit Planning

• Underperformance thresholds
• Transition cost consideration
• Client communication approach

The Path Forward

Near-Term Outlook (2026-2027)

• Active ETF AUM projected to exceed $1 trillion
• RIA active allocation reaching 18-20%
• Continued fixed income and international leadership
• Increased semi-transparent adoption

Longer-Term Evolution

• Active/passive distinction blurring
• Factor-enhanced active strategies growing
• AI-powered active management emerging
• Fully customized active SMAs expanding

Conclusion

The RIA shift to active ETFs reflects rational portfolio construction evolution, not a rejection of passive investing. Advisors are recognizing that different market segments require different approaches, and active management in efficient, tax-advantaged structures finally delivers on its promise.

For RIAs, the opportunity is building portfolios that leverage the best of both worlds—passive efficiency where markets are efficient, active management where skill generates value.

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Wealthmetrica tracks RIA portfolio trends and manager relationships to help asset managers identify distribution opportunities in the active ETF space.